TWO LICs YOU WILL PROBABLY HATE.

Being a contrarian investor is easy, just find some stock ideas that are not popular. Doing it successfully is not so easy! I have been doing my own little experiments lately and getting some indication of investor sentiment anecdotally with a very small sample set, and I don’t think my boring investment style is that interesting right now in a raging bull market.

Not so sure a “hated bull market” is a good description anymore. I get the feeling many are enjoying it now and will fall asleep reading my suggestions below, and fall into a dream about the latest likely ten bagger mentioned on hotcopper. The ideas below will be about as popular as Crown Lagers among a selection of craft beers at a gathering of hipsters.

These two LICs have frustrated plenty of investors over the last year or two, and somehow I have ended up buying them in the last month or so. I wouldn’t be surprised if I get some comments that these ideas are a bit crazy, but on balance I would treat such a reaction as giving me more confidence they might work out!

As usual this is not financial advice so DYOR and don’t blindly copy these suggestions, having said that they are so unpopular no one probably will anyway!

ALI – ARGO GLOBAL LISTED INFRASTRUCTURE LIMITED

Firstly, I want to make it clear I am not overly critical of the Argo Investment Company, they have held a well-deserved excellent reputation for providing a low cost LIC which has delivered steady performance for decades in ARG. A great alternative to many expensive index hugging managers in the Australian equity market.

Many investors though seemingly have doubts about a more recent LIC, the Argo Global Infrastructure Limited LIC (ALI). ALI is much smaller than ARG, meaning that I overall judge Argo mainly on delivering a good product for investors via ARG.

I found it interesting that one of the more well-known fans of Argo, Scott Pape the barefoot Investor, couldn’t get very excited about ALI. Even one of the directors whom he spoke to didn’t seem overly excited in this interview.

https://barefootinvestor.com/argo-global-listed-infrastructure/

I am guessing nonetheless that many long-term holders of ARG would have happily parted with some funds to take advantage of their priority allocation. The great reputation and trust many have in Argo made it quite easier for them to raise plenty of funds for such a product. Perhaps many wouldn’t have even closely examined the fee structure? It was done at an opportune time with the LIC market having recovered to be very buoyant, and many private investors searching for offshore exposure to help with diversification. It provides Argo with a steady amount of management fees, with perhaps not a huge amount of ongoing effort required, but does it offer the investor who participated in the IPO anything special?

I will briefly list some doubts over this LIC.

FEES

Whilst I don’t mind seeing no performance fees, the base management fee is 1.2%. They are certainly not the most expensive in the market, but what I found unusual was the breakdown of such fees.

WHERE DO THE FEES GO?

From my understanding, I hope to be quickly corrected if I am wrong, is that the “portfolio manager” is Cohen & Steers Capital Management. The “manager” in this case is Argo. So Argo appoint Cohen & Steers, who make the investments of the portfolio and advise Argo of how things are going.

Cohen & Steers and Argo share the fees that come out of the company on a 50/50 basis. Sound fair?

In fairness I think it may not be that easy for us small Australian investors to access Cohen & Steers funds at better than the 1.2% fee, but I think a similar Closed End Fund exists on an offshore exchange. So I have no objective with Argo getting an ongoing slice, even if it shouldn’t take an excessive amount of work for them once it is up and running. I just have some doubts whether taking half leaves enough room for the end investors in ALI to get a good result overall.

 

WHAT DO ARGO DO?

Argo have appointed the portfolio manager being Cohen & Steers. Argo will have to monitor and supervise how C&S are going as portfolio managers on behalf of shareholders, and decide whether this relationship is best to be continued with in the future. They manage the general affairs of the company, and also adminstration etc.

ARG is renowned for lean fees, so I was surprised to see the Argo name being put to a product where the fee structure is of this nature.

I think the Contango global LIC may have a kind of fee arrangement not too dissimilar. Regular readers of this blog may get the impression I don’t rate Contango as world beaters with corporate governance matters. Argo as I have pointed out have a well earnt good reputation in this regard though to date.

 

DISCOUNT TO NTA BUT HOW MANY SHARES HAVE BEEN BOUGHT BACK?

A modest buyback has recently been announced, 5% where often 10% is used by other companies. But is this a “Clayton’s” buyback? Sorry for my Gen Y audience they may need to read the following when I refer to Clayton’s.

https://en.wikipedia.org/wiki/Claytons

 

A LARGE DISCOUNT TO NTA, AN OPPORTUNITY FOR MANAGEMENT TO PUT MORE SKIN IN THE GAME?

In the last Annual Report, I only saw director’s holdings in the stock that I struggle to describe as more than “modest” exposures. At the time of writing I have only just very recently noticed them buying more. This is mildly encouraging but the purchases are more of the amounts a mug punter like myself may buy occasionally. For this type of LIC structure I was surprised to see the amounts of director’s fees in total that were paid. I can vaguely recall the company remarking that the discount to NTA represents an attractive way to invest in ALI for other investors, but how about themselves?

ARG has a large stake already, but not so large from the perspective of the overall fund size of ARG. Is the stake held because they are true believers in ALI, or for other reasons?

 

PERFORMANCE AS A LIC

Looking at the latest NTA report at the time of writing, it shows performance of 4.9% per annum versus their benchmark at 8.6% per annum.

 

LONGER TERM PERFORMANCE

In fairness to the product, I fully accept that the record as a LIC is too short to make too many judgements regarding the investing performance of the portfolio. From what I have read, I do regard C&S as quite a capable manager in this specialised space. There appears to be enough historical evidence that C&S can add alpha within their categories even after fees. Of course, we can’t be sure of this continuing in the future. History can be a useful guide, but achieving outperformance as an investor in ALI would be easier without Argo receiving the extent of fees they do. And it doesn’t appear to me that C&S are hugely active investors, so I am also a little sceptical regarding fees in the context of their bets versus the benchmark.

 

WHY ON EARTH WOULD I OWN THE STOCK THEN?

Well these types of discounts to NTA are rare these days, and were it to widen I suspect eventually the modest share buyback will provide a little bit of support.

I also watch as an outsider in the situation going on with WDE. We saw Wilson buy a substantial stake, and only AFTER this occurred, Perennial are increasing their stake and causing some competitive buying that has reduced the discount to NTA. Could there be some parallels there? As I write there is not a known activist with a substantial stake in ALI. Yet with the IMA as it is, a large discount, a liquid portfolio, I could see the temptations from some perhaps.

I have observed a closed end fund from Cohen & Steers that looks quite similar to ALI, which normally trades at under a 10% discount and the expense ratios do not look much different. If this is correct than ALI shares (when they traded at a 15% discount to NTA where I estimated I purchased) may stack up ok on a relative comparison.

What is far more important of course is ultimately where the NTA goes from here. This sector has been very boring as the global bull market has been in full swing this year, meaning it is one of the few relatively depressed areas. If the global economy does suffer some unexpected jitters, it wouldn’t shock me to see a few tailwinds for the ALI portfolio. That may consist of a falling AUD, falling bond yields, and a pickup in relative demand for perceived defensive stocks.

In some of the quarterly commentaries I have observed the lacklustre oil price has been a bit of a headwind for some of their stock exposures. I don’t mind an investment where an improvement in oil prices may act as a small tailwind. When reading headlines about “the everything bubble”, this type of exposure doesn’t seem all that popular right now but could change.

If I am wrong on the above then it is possible the unusual structure of ALI may not be that sustainable. I am not convinced Argo can necessarily keep the IMA structure the same in the medium term to longer term, should other shareholders be frustrated with the performance. Large cuts to either the fees Argo get, or C&S or both may deliver a product that can better deliver good results for shareholders. If that doesn’t reduce the discount to NTA, a sizeable off market share buyback could be used given the LIC still would have the scale to cope with admin costs even if it is smaller.

Common sense would hopefully see Argo address some of the issues themselves, but common sense is not so common these days and sometimes management are slow to act and leave it to others. I have been encouraged by some in the investment management industry who have taken the initiative to cut their own management fee income in recent times.

C&S look like a capable manager but having a somewhat lean run, they could easily turn things around in my opinion. If there is not much change to the overall structure of ALI, although I don’t agree the fees should be as high as they are, they are at a level that I can still tolerate when entering at a discount to NTA of about 15%.

As usual I welcome all feedback if any can point out areas where my analysis is off the mark. That is probably the main reason for me blogging after all. It is not a large position for me yet, so I have room to back track if I get convinced from others this sounds like a poor investment.

P.S.

On a lighter unrelated note, I came across this picture on the net recently and found it amusing.

ali

 

ALF – AUSTRALIAN LEADERS FUND LIMITED

I am limited in time on writing about ALF but thought I would mention I bought some recently. I haven’t timed it well and they have eased a little since, although with ALI they gained so in broad terms these two are kind of at levels I have bought as I write now.

In referring back to the contrarian theme, I have found it interesting observing some of the frustrated investors on the hotcopper forum about ALF. Regarding this I would like to point out the following.

  • If you bought ALF shares, surely they are the type of investment to give them a full cycle to judge them? I mean including a down market (yes down markets are not extinct yet).

 

  • Many excellent investors have very long periods where they can underperform benchmarks considerably. You can even find long stretches where Warren Buffett looks very ordinary. (before you point it out, I am quite aware Justin Braitling is not Warren Buffett!).

 

  • If you bought ALF shares, did you pay an excessive premium to NTA, e.g. 20% plus?

In conclusion, if an investor has given ALF a reasonable timeframe and paid a sensible price in relation to NTA, I would be surprised if they are tearing their hair out on hotcopper. I don’t recommend forums to copy stock picks whether it be tips to buy or sell, but must concede sometimes in certain stocks you can smell a sense of capitulation in postings. I normally see this in beaten down companies in the resources sector where I hunt for shell companies trading at less than cash. Sometimes investors are happy to sell a stock at a 30% discount to cash because the management doesn’t plan to try and turn the shell into a 10 bagger. The burnt investors want the ten bagger because of the anchoring bias, i.e. they must get back past losses in the same stock for some reason.

Anyway I digress! I suppose an element of this purchase is the contrarian streak running through me, let’s see how it goes.

I shall finish with the long-term performance numbers of ALF since inception after fees, under the guidance of Justin Braitling (who is no Warren Buffett but I am happy to back for now to turn things around one day). Am also guessing Geoff Wilson might have some faith, students of the history of LICs would be aware of the early link between the two at the start of this LIC, and there is a link still today.

Below is to September 30th. As I write the latest isn’t available and I am fully aware October was a Barry Crocker, but won’t change the message that long-term numbers the product has been successful in regards to the message they are selling.

ALF.jpg

Source: NTA report released on October 13th.

20 thoughts on “TWO LICs YOU WILL PROBABLY HATE.”

  1. Nice analysis. I’ll take one, but not the other.

    There was quite a crowd at the post AGM roadshow I went to in Melbourne a few weeks ago for ALI.

    The infrastructure story of steady cash flow seems to be well matched to Argo’s conservative shareholder base.

    The US manager put their slight underperformance to date down to being wrongfooted around Grexit (or Brexit, I can’t recall). They also adjusted the mandate to focus on assets not bonds. Sounded sensible.

    I got onboard in March on a technical signal. Momentum is slowly picking up but we’ll have to be very patient.

    On ALF, it’s carnage that may take a while to repair. The knife is still falling through one resistance level after another.

    I’ll be there when there is evidence that healthy NTA growth is being achieved and buying and selling reaches more of an equilibrium.

    Although I can’t see it falling much further, it’ll surely go sideways for a long time before getting bid up.

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    1. Well one out of two, could be worse I guess! ALI I suppose they are talking more at least about addressing the discount and improving performance but not a lot of action yet. ALF could get ugly if November is as bad as October. Interesting to watch the share buyback in ALF soon. From memory one year with WMK they didn’t muck around and did a serious buyback.

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  2. Short on time but a thought as about to head up north for a number of days.

    Infrastructure assets have been in high demand in the Hunt for yield. Bond proxies essentially. I saw an interesting article the other day on this topic but can’t find it again. If interest rates rise is there a possibility that this sector of the market might suffer significant price falls?

    Cheers

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    1. That is a very real risk! I don’t have a strong opinion. I suppose in the back of my mind is a post on the blog I made recently about quite a few macro forecasts of trends that were supposed to occur in 2017, but the forecasts didn’t prove that accurate.

      The hunt for yield trade I feel was hot over a year ago but not so much in the last year. After all, examine the ALI returns and it’s benchmark, not that exciting to date.

      Balancing the risk you highlight is the potential for large gains should bond yields decline. Also the question is where do rates rise? If it is a stronger US story it may be accompanied by a weaker AUD/USD that assists ALI investors.

      I try and put together an “all weather portfolio”, so personally I imagine if rates rise sharply it will cause quite a bit of carnage to the whole market. ALI will get hit but we might finally get a chance to put more cash to work.

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  3. Hi Steve – you’ve used the term “raging bull market”. I’m interested in why you see it that way. The DJ & Nasdaq are clearly in a bull market but the all ords has finally crept past 6000 and is up about 10% for 12 months. It’s been a good run for the last month but doesn’t feel like we’re raging. I realise that the infrastructure fund is global and ALF is local and global.

    I’ve never owned Argo and ALF, I’m aware of them but don’t follow them. I think your premise is to try and find LICs at with good management and performance histories at significant discount to NTA. A quick look at the yahoo finance chart tells me that ALF was trading around $1.40-$1.50 5 years ago and is $1.04 today. Please correct me if I’m wrong and I don’t know what dividends would have been paid. This investment idea feels like it falls way too much on the side of being rewarded because of the NTA discount. 5 years of going backwards is enough for me, I don’t want to give my money to these people.

    Maybe a better example of this kind of play is MFF, which I think you’ve talked about here. It was trading at a significant discount but also had a good performance history and has run well over the last few months.

    Anyway, maybe things are cheap sometimes because they’re no good and maybe things that were good 10 years ago can be no good today. I like your column but unless I’m missing something I wouldn’t buy these two either. Cheers.

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    1. Noddy, If I may chime in and say don’t ignore dividends and franking credits on Australian shares. E.g. In the last 12 months since 13 November 2016, Vanguard Aus Shares VAS ETF, Total Return is 18.57%. The Capital Gain was 12.77% and the Dividend with franking was 5.80%.

      Similarly, ALF 5 and 10 year Total Return is over 7% p.a and that’s counting the -24% negative return in the last 12 months.

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    2. Hi Noddy,

      Yes fair call perhaps the description was a bit strong of the bull market. I had in my mind global markets, where the US is quite strong but many other global markets are doing even far better in 2017.

      I don’t think the yahoo chart is a great example of assessing the merits or otherwise of ALF. Investors a few years ago were paying over a 20% premium to NTA. So there is about a 30% plus decline purely because investors are fickle about their LICs, as opposed to the actual fund NTA performance. They did pay some huge dividends for a few years which also makes the chart look worse I imagine.

      It’s quite possible the manager was good five years ago and not so today. Having said that if Berkshire holders had that attitude with Buffett they would have regularly sacked him! If one believes the since inception figure is relevant, I don’t think you can label them no good. All depends on your timeframe for judgement.

      I have a very healthy respect for Magellan. I just have had a preference in the last year or so for some of the other global LICs that invest more in other markets outside of the US.

      Cheers
      Steve.

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  4. Thanks guys, yes – just looking at the share price over time doesn’t tell the whole story if they’ve spun out some extraordinary dividends. If I look at ALF’s NTA over time then it was $1.25 after tax at end of Oct 2012 and $1.21 for Oct 2017. Does anyone know what the dividend payout impact on NTA has been over that 5 years? If you were looking at investing in this, it’d be worth calculating. Ignoring the discount/premium to NTA and allowing for dividends would tell us about their investment performance.

    I get the idea of making trades that involve buying from sellers that have become frustrated and want out at any price – but if they’ve underperformed the market for 5 years (I don’t know if that’s the case but suspect it is) then we’re not talking about a blip of a bad month or two. We’d be talking about a turnaround play. A bet based on hope, in my opinion. I think I’d just rather pay NTA or thereabouts to some fund managers that have been doing a good job. I have to say that when I just went to check their NTA now as part of this exercise and out of my own curiosity and saw that they have gone minus 3% in the last month – well….

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    1. I remember an AFR journo getting stuck into one of Magellan’s funds last month because they were basically in line with benchmark for the 5 year number.

      Is there much difference with your logic there? I can’t find the exact MFF 5 year performance record so would be interested to view it. But are they also an example of close to benchmark over 5 years but excellent record for longer periods, a bit like ALF?

      The MFF product might be different to what the journo was referring to so I could be mistaken.

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    1. I also like sharesights so maybe they should pay us to talk about it! I am more interested in performance of the fund manager which can differ when we get swings in discounts / premiums to shareholder return.

      According to a bell potter report MFF still have added plenty of alpha on 5 year numbers so not really comparable to the ALF situation I don’t think. I was wrong there.

      I don’t want to come across is hugely confident in ALF. I only have a half position and plan to potentially add again if I can potentially get them at $1 when the NTA might be close to $1.20.

      Just wary of judging fundies on 5 years when they have a great record over longer periods. Have a look at the relative performance on the Platinum funds over the last year. Shot the lights out after their 5 year records were being heavily criticised.

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  5. THANK YOU FOR A VERY DETAILED AND THOUGHTFUL DOUBLE PIECE.
    i would have been interested to see a little more about the US listed comparative to the ARGO fund.. BUT ENJOYED READING THIS ANALYSIS

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    1. Yes no worries, I kind of got a bit tired writing and glossed over that.

      I think the code might be UTF:US on the NYSE. There might be some inbuilt gearing into this closed end fund though. But if Argo say they are brining a product to Aussie investors that they could never access they may be technically correct. But maybe an investor could have got something similar with an Etrade account and buying this on the New York exchange? Maybe it has even done better than buying AGI in the IPO? I probably glossed over it as I need to check it out further.

      If anyone feels like adding comments about this UTF:US (is it similar and do I have the right one?) go ahead!

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  6. Hi Steve, I also hold ALI for much the same reasons as you’ve described very well here. I fully agree on fees and would like to see Argos take halved and Cohen too but they can add a PF. So that would be 0.6% plus performance instead of 1.2%. I don’t like hedge funds so not really keen on ALF although I agree with you that it seems interesting lately…

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    1. Hi Adrian,

      Good call there. I was thinking the Argo take needs to be slashed in half. Overall fee below 1% may appeal to more.

      Depending on the size of performance fee obviously, that suggestion also could be the way to go.

      The slide on addressing the discount to NTA in their presentation was underwhelming. Contained some marketing things and basic communication that any LIC should do from day 1, together with capital management initiatives we are still waiting on.

      Cheers
      Steve.

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  7. ALF long term perspective. I’ve held them since inception as the original Wilson Leaders. They have paid 110c in divs and increased NTA by 4.5c. This works out at 15% pa. I’ve done a lot better as I averaged down to a 88c entry price and as mentioned elsewhere sold options at an opportune time.

    Not sure of the relevance of the 15% however, as much of this time the fund was long only. The short side is a relatively recent phenomenon. I did some work on this a while back and concluded that over the cycle the short side did not add value.Sort of backed up a theory of mine that short selling does not work. For a start, markets basically rise, so one is up against it from the start. You then throw in successful shorts that turn into instant losses when a takeover bid is made.

    Interestingly, ALF used to supply a monthly attribution table that detailed the long and short contributions. Probably the most useful info I’ve ever come across in a monthly report. A while back they dropped this. When I asked why, I was told that it was because most people didn’t understand it. I wondered at the time if those who did were asking embarrassing questions.

    Another point is that unlike stablemate WMK, ALF can change the long / short balance. This is in affect a market timing strategy. They have been positioned for a downturn for a couple of years. Eventually they will be right. Whether they recoup the interim accrued under performance is anybodies guess. Just hope they don’t do a John Spalvins, who famously shorted the mid 80s bull market, but then changed his mind just before the market peaked.

    ALF Short term perspective. By my reckoning they are trading at their biggest discount to NTA since 2012, so on that basis alone they are probably worth a punt. This stock departs from NTA in both directions, and for no apparent reason, more often than most, so I guess it is a good one to follow.

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    1. Appreciate the feedback Graeme, being in a stock for a long period gives a better insight no doubt. This is the first time I’ve been a shareholder. I’d also be skeptical about the answer to your query on attribution reporting. Does the annual report still give some breakdown, I thought from memory I saw something like that?

      One aspect I’d be curious of your thoughts on would be recent staff changes and expanding the mandate to offshore. My thinking was they seem to have at least hired some decent experience from elsewhere. Once again my mind goes back to Platinum who had to bring in some new staff but bounced back well.

      I don’t mind the extra global opportunity set since I recall often their research would heavily touch on global themes previously anyway. They are not compelled to use a certain number of global trades. Imagine it must open up some interesting pairs trades that one day they will get right!

      Others may have different views about these issues though.

      Even though their net exposure right now is kind of market neutral I think it’s a much better play than WMK. Fee structure, scale and flexibility is preferable over WMK I think.

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  8. Sydney-based equities investor Watermark Funds Management has gone offshore to find its new international equities specialist.

    Harvey Migotti, an analyst at global long-short investment firm Balyasny Asset Management, is joining Watermark as its head of international equities.

    Migotti spent four years with London-based Balyasny and previously worked for Amiya Capital and Apax Partners, specialising in sectors including aerospace, defence and TMT.

    He will report to Watermark founder and chief investment officer Justin Braitling.

    Watermark is a Sydney-based long-short fund manager with about $700 million in funds under management. About two thirds of its portfolio is believed to be in Australian equities, with the rest invested offshore.

    Read more: http://www.afr.com/street-talk/watermark-recruits-new-head-of-international-equities-20171114-gzlls5#ixzz4yUh5MtYw
    Follow us: @FinancialReview on Twitter | financialreview on Facebook

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  9. Great article. Since Jan 2016 it has been hard going for long short managers.
    Absolute Equity (AEG.AX) came on with a lot of hype but struggled (now coming back)?
    Totus (hedge fund, performance on website) was awesome CY13-15, CY16 weak, CY17 better,
    Bronte (hedge fund, performance on website) is lower risk (and return) but similar pattern to Totus. CY17 strong.
    LHC (hedge fund, performance available by subscribing) same pattern, CY17 fairly weak.

    these managers all have different style and risk but ALF investment performance does not screen well. Having said that if they can generate more consistency the discount may narrow. And accept that Wilson etc may become interested at some stage.

    Like

    1. It can be very fickle! AEG was a darling shortly after listing. I doubt I could ever get interested in AEG though due to the performance fee hurdle, if you could call it a hurdle. I haven’t checked those other ones but assume ALF has done a lot worse the last 12-18 months?

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